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SEPA, Efficiency, and Payment Card Competition

  • Wilko Bolt
  • Heiko Schmiedel

This paper analyzes the welfare implications of creating a Single Euro Payments Area. We study the effects of increased network compatibility and payment scale economies on consumer and merchant card fees and its impact on card usage. In particular, we model competition among debit cards and between debit and credit cards. We show that competitive pressures dampen merchant fees and increase total card acceptance. The paper argues that there is room for multilateral interchange fee arrangements to achieve optimal consumer and merchant fees, taking safety, income uncertainty, default risk, merchant's pricing power, and the avoided cost of cash at the retailers side into account. Consumers and merchants are likely to benefit the most from the creation of SEPA when sufficient payment card competition alleviates potential monopolistic tendencies. Key Words: SEPA, card network competition, optimal pricing, economic welfare

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Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 239.

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Date of creation: Jan 2010
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Handle: RePEc:dnb:dnbwpp:239
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  1. Julian Wright, 2001. "The Determinants of Optimal Interchange Fees in Payment Systems," Industrial Organization 0108001, EconWPA.
  2. Graeme Guthrie & Julian Wright, 2003. "Competing Payment Schemes," Departmental Working Papers wp0311, National University of Singapore, Department of Economics.
  3. Wilko Bolt & Sujit Chakravorti, 2008. "Consumer Choice and Merchant Acceptance of Payment Media," DNB Working Papers 197, Netherlands Central Bank, Research Department.
  4. W. Bolt, 2003. "Retail Payments in the Netherlands: some Facts and Some Theory," WO Research Memoranda (discontinued) 722, Netherlands Central Bank, Research Department.
  5. repec:rje:randje:v:37:y:2006:3:p:645-667 is not listed on IDEAS
  6. Heiko Schmiedel, 2007. "The economic impact of the Single Euro Payments Area," Occasional Paper Series 71, European Central Bank.
  7. Wilko Bolt & Sujit Chakravorti, 2008. "Economics of payment cards: a status report," Economic Perspectives, Federal Reserve Bank of Chicago, issue Q IV, pages 15-27.
  8. Guido K. Schaefer, 2008. "An Economic Analysis of the Single Euro Payments Area (SEPA)," FIW Working Paper series 011, FIW.
  9. Christine Beijnen & Wilko Bolt, 2007. "Size matters: economies of scale in European payments processing," DNB Working Papers 155, Netherlands Central Bank, Research Department.
  10. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, 09.
  11. Chakravorti Sujit & Roson Roberto, 2006. "Platform Competition in Two-Sided Markets: The Case of Payment Networks," Review of Network Economics, De Gruyter, vol. 5(1), pages 1-25, March.
  12. Hasan, Iftekhar & Schmiedel, Heiko & Song, Liang, 2009. "Return to retail banking and payments," Working Paper Series 1135, European Central Bank.
  13. James J. McAndrews & Zhu Wang, 2006. "Microfoundations of two-sided markets: the payment card example," Payments System Research Working Paper PSR WP 06-01, Federal Reserve Bank of Kansas City.
  14. Fernando Alvarez & Francesco Lippi, 2007. "Financial Innovation and the Transactions Demand for Cash," EIEF Working Papers Series 0807, Einaudi Institute for Economics and Finance (EIEF), revised Sep 2007.
  15. Chakravorti, Sujit & To, Ted, 2007. "A theory of credit cards," International Journal of Industrial Organization, Elsevier, vol. 25(3), pages 583-595, June.
  16. Bolt Wilko & Humphrey David, 2007. "Payment Network Scale Economies, SEPA, and Cash Replacement," Review of Network Economics, De Gruyter, vol. 6(4), pages 1-21, December.
  17. Özlem Bedre-Defolie & Emilio Calvano, 2010. "Pricing payment cards," ESMT Research Working Papers ESMT-10-005, ESMT European School of Management and Technology.
  18. Baxter, William F, 1983. "Bank Interchange of Transactional Paper: Legal and Economic Perspectives," Journal of Law and Economics, University of Chicago Press, vol. 26(3), pages 541-88, October.
  19. Kemppainen, Kari, 2008. "Integrating European retail payment systems: some economics of SEPA," Research Discussion Papers 22/2008, Bank of Finland.
  20. Gene Amromin & Sujit Chakravorti, 2009. "Whither Loose Change? The Diminishing Demand for Small-Denomination Currency," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(2-3), pages 315-335, 03.
  21. Richard Schmalensee, 2001. "Payment Systems and Interchange Fees," NBER Working Papers 8256, National Bureau of Economic Research, Inc.
  22. Wright, Julian, 2003. "Optimal card payment systems," European Economic Review, Elsevier, vol. 47(4), pages 587-612, August.
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